As you get older, there are several financial responsibilities that become more prevalent over time. You may be wondering how you can possibly pay for housing, food, insurance, health care, debt repayment, and fun without running out of money. That’s a lot to cover with a limited paycheck. The answer is simple: make a budget.
A budget is a plan for every dollar you have. It’s not magic, but it represents the potential for more financial freedom and a life with much less stress.
How to Budget Money:
Begin by calculating your monthly income, pick a budgeting method and monitor your progress. A common method is to go by the 50/30/20 rule.
Allow Up To 50% of Your Income for Needs
Your needs should include:
- Basic utilities
- Minimum loan payments. Anything beyond minimum goes into the savings and debt repayment category.
- Child care or other expenses you need so you can work
If your essentials go over the 50% mark, you may need to dip into the “wants” category and adjust your spending.
Leave 30% of Your Income for Wants
Separating your wants from needs can be difficult. In general, needs are essential for you to live and work. Wants typically include dinners out, gifts, travel, and entertainment. However, it is important to understand that differentiating between the two categories can vary from person to person.
If you are eager to get out of debt, you may decide that your wants can wait until you have some savings or your debts are under control. Even if you are trying to eliminate your debts, it’s important to remember to do something for yourself.
Your budget is a tool to help you. If there is no money for fun, you’ll be less likely to stick with your budget- and a good budget is one you’ll stick with.
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Commit 20% of Your Income to Savings and Debt Repayment
With this portion of your monthly paycheck, you should put something away for the unexpected, save for the future, and pay off debt. Make sure you think of the bigger financial picture. This may mean that you two-step between savings and debt repayment to accomplish your most pressing goals.
Over the long term, someone who follows these guidelines could have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.